Finding a cheap place to fill up just got harder

Transport funding and how much we’ll all pay at the pump has been all the (road) rage recently. In late March, the government introduced legislation to allow Auckland Council to implement a regional fuel tax, and in early April the Government Policy Statement on Land Transport was published, signalling a 3-4c/l annual increase to petrol prices nationally.

This article breaks down what the Auckland regional fuel tax would look like in practice, and what the potential effects on transport users are. Auckland motorists will need to be prepared to pay now for better connectivity across Auckland in the future.

What’s it for and how does it work?

Transport is shaping up to be an important, and costly, area for the new Government. Auckland has been identified again for more transport investment. The Auckland Transport Alignment Project (ATAP) will account for more than $24 billion in spending over the next ten years, with Auckland Council and the Government splitting the bill ($15b and $9b respectively under the current plan). Auckland Council intends to fund its share of the investment with the help of a regionally-based fuel tax.

Fuel (both petrol and diesel) sold in Auckland would be subject to a 10c per litre tax under the new regional fuel tax, with the money ringfenced to pay for transport projects. Auckland Council and the Government contend this tax will bring in around 10% of the total budget Auckland Council need over the next ten years.

Looking at wholesale fuel sales in Auckland, this tax could have brought in $170m over the year to June 2017. A regional fuel tax of this size would be larger than the $60m per year that Auckland Council currently gets from the Interim Transport Levy. This Levy, which is replaced by the regional fuel tax, was a lump-sum levy of $114 per household or $183 per business.

Source: Auckland Council, Auckland Transport, Infometrics

Pumping up the price

Fuel is a major cost for a host of sectors, specifically freight movement businesses and firms with large car fleets such a hire companies.

Firms with large vehicle fleets are likely to be most affected, as they use more fuel than other businesses. Previously every business, regardless of how much travel they did, paid the same $183 lump-sum each year. With the regional fuel tax changes, this $183 lump sum fee will be waived, but most firms with large vehicle fleets will be paying far more in additional fuel tax if they choose to fill up within the Auckland region.

These higher fuel prices will, at least in part, be passed on to customers.

Fuel taxes are also regressive, hitting low income consumers most in the pocket. Low income households in Auckland tend to live further away from employment opportunities, meaning a higher burden will be placed on these households for getting to work and school.

Border town price wars?

Auckland has a lower petrol price than the national average, sitting at $2.02/l compared to the main port price of $2.09/l in the week ending March 30. With this gap representing a considerable cost saving for transport firms, an Auckland-only fuel tax will pressure firms to fill up elsewhere and game the system to reduce costs. In the Regularity Impact Statement, the Ministry of Transport note this possibility themselves, stating that “large road freight companies could reduce the value of fuel purchased in Auckland by $20 million per annum [to avoid the added costs].”

Truck stops and service stations on the edges of Auckland (in the south of Northland and North Waikato) would see drastically increased sales volumes. Large fleets (i.e. truck units) wouldn’t have to go out of their way for cheaper fuel.

Furthermore, fuel companies may not implement the tax regionally. Auckland is a big market for fuel companies, making up around 33% of New Zealand’s VKT (Vehicle-Kilometres-Travelled) total. Instead of a 10c/l tax only on fuels in Auckland (which could become a costly administrative nightmare) fuel companies could change a 3c/l tax national to recover the same tax income.

It’s worth noting that the last regional fuel tax scheme in the 1990s was scrapped for precisely the same reason: firms distributed the tax burden across the country but spent the funds regionally.

Source: MBIE, Gaspy.co.nz, Infometrics

Is Hamilton the next cab off the rank?

Auckland has some of the most pressing infrastructure needs in New Zealand. It’s clear that transport gridlock within the city is not only incredibly frustrating but expensive – a NZIER report found that traffic delays cost Auckland $1.9b per annum. The case for a regional fuel tax in Auckland is well made, but could a regional fuel tax work elsewhere in New Zealand?

Hamilton City Council are eager to lobby for their own regional fuel tax to open up access to new funds. Rising congestion and transport upgrades are forcing rates higher in the City, and the council is interested in new ways to fund their increasing transport costs.

However, under the proposed legislation, no future regional fuel taxes are possible until 2021. Any future proposals would need Government approval, and given comments by Government Ministers, the chances are slim.

Fuel taxes the final turn onto the home straight

By shifting away from a ratepayer-based levy towards a fuel consumption tax, transport funding in Auckland is on step closer to a full user-pays capture system. Yet in doing so, the regional fuel tax model provides ample opportunities to work the system in a firm’s favour (to reduce costs), and won’t fairly allocate the cost burden. The final frontier of user-pays transport is congestion charges – though we currently lack the technology to make such a system work. Congestion charges would see prices accurately allocated to shift transport behaviours, rather than just funding projects to alleviate pressure.

While we wait for the right technology, businesses would do well to keep an eye out for the nearest non-Auckland petrol station. Firms will also want to review their own price settings and adjust their budgets to account for the increase in fuel prices. Although greater public transport, rail, and rapid transit will aid transport connectedness across Auckland in the long run, consumers will need to be prepared to pay for it now.

Enjoyed this article?

You might like to subscribe to our newsletter and receive the latest news from Infometrics in your inbox. It’s free and we won’t ever spam you.